OAO Gazprom (OGZD), the Russian gas exporter that agreed to price discounts with almost all of its European clients out of court, will pursue a solution with RWE Transgas AS in arbitration after talks failed.
“Gazprom Export was ready to find a mutually coordinated, reasonable solution, as with other long-term European partners previously, but as of today the talks with RWE Transgas on revising price conditions have not met expectations,” the Russian company said yesterday by e-mail. “The parties have to continue the search for a solution in arbitration.”
RWE Transgas, the Czech unit of Germany’s second-largest utility, has urged Gazprom to base long-term gas-supply contracts on the spot market rather than on oil prices, which have climbed 90 percent in the past four years. It’s among European utilities putting pressure on the Moscow-based exporter after the 2008 recession cut demand, dragging down spot prices.
RWE is seeking a solution next year at the latest, with or without arbitration, Sabine Jeschke, a spokeswoman for RWE Supply & Trading GmbH, said by phone from Essen, Germany. “We want to find a structural solution, not a one-time price reduction but a successive change from oil-linked prices.”
Gazprom, which supplies a quarter of Europe’s gas, has agreed to revise prices for Germany’s EON AG, Italy’s Eni SpA (ENI) and Poland’s Polskie Gornictwo Naftowe i Gazownictwo SA (PGN) as it seeks to keep market share amid cheaper coal deliveries from the U.S. and an expansion of liquefied natural gas.
The Polish utility, known as PGNiG, secured a price discount yesterday of 10 percent to 20 percent, Poland’s Treasury Minister Mikolaj Budzanowski told TVN CNBC television. The compromise will help PGNiG raise earnings by as much as 3 billion zloty ($930 million) this year, according to the company, which agreed to withdraw arbitration against Gazprom.
EON (EOAN), Germany’s largest utility, said in July its accord with Gazprom would add about 1 billion euros ($1.28 billion) to half-year results, and also dropped its arbitration case.
Gazprom’s only remaining legal dispute over prices is with RWE Transgas, whose insistence on using spot prices contrasts with European peers that agreed to accept discounts. Gazprom Export lost a separate arbitration case with the Czech company last month over the so-called take-or-pay rule, which obliges customers to take delivery of minimum volumes or pay for them. Gazprom said it may appeal the Vienna tribunal ruling.
Arbitration over pricing is a “last resort,” Gazprom Export said yesterday, adding that it will be “grateful” if the process leads to a commercially viable solution that considers the interests of both parties.
The state-run gas exporter has already provided $4.2 billion in retroactive discounts to customers including EON and Eni, eroding profit. Yesterday’s PGNiG deal is also retroactive, covering 2011 and 2012, the Polish company said.
“One should anticipate further discounts as competition pressure is building up in Europe, leaving Gazprom few opportunities to defend its positions,” Ildar Davletshin, an energy analyst at Renaissance Capital in Moscow, said by phone.
More than half of Europe’s gas supply is bought through long-term contracts linked to the price of oil, and that will remain the case until 2014, according to Societe Generale SA.
While the Russian exporter insists the European gas market doesn’t have sufficient liquidity to base gas prices on spot, GDF Suez (GSZ) SA, one of Gazprom’s clients, said the oil-linked pricing system is unsustainable.
“Everything is leading to spot prices becoming reference points, first in France, Benelux, Germany and Scandinavia, and then eastern Europe,” Alexei Kokin, an analyst at UralSib Capital in Moscow, said by phone today. “It doesn’t matter where it’s based, the spot market gives price guidance.”
Gazprom first agreed to “consider” spot prices for some European customers following a wave of contract renegotiations at the start of 2010. Its retroactive discounts this year left the take-or-pay clause intact and kept the oil link, without raising the weight of spot indexation.
Market rates were taken into account in its accord with PGNiG, without being directly included in the pricing formula, Gazprom said yesterday.